ExxonMobil inventory is up greater than 30% this yr. Too late to purchase?


ExxonMobil (NYSE: XOM) had a tough yr 2020. The corporate recorded its first annual loss in at the very least 20 years. Rising oil costs have pushed the inventory greater this yr, however has the worst gone for the oil large? Let’s take a more in-depth have a look at the corporate’s operations and plans to know the way it may fare in the long term.

The woes of ExxonMobil

ExxonMobil was hit on all fronts final yr. Decrease oil and fuel costs and diminished manufacturing volumes impacted the Firm’s upstream enterprise. On the identical time, declining refining margins and demand damage its downstream actions. As well as, primarily based on an evaluation of adjusting market situations, the corporate determined to not develop a good portion of its dry fuel belongings, leading to a large depreciation of almost $ 17 billion. {dollars} within the fourth quarter. The choice additionally took into consideration the necessity to scale back capital spending to focus solely on essentially the most worthwhile belongings.

ExxonMobil generated $ 14.7 billion in money from working actions final yr. This did not cowl his large capital spending and dividend spending for the yr, forcing him to borrow funds for a similar. The corporate paid out $ 14.9 billion in dividends whereas spending round $ 19.5 billion on capex. Its proceeds from the sale of belongings amounted to $ 1 billion.

XOM return on invested capital given by YCharts

Along with tough market situations, ExxonMobil’s woes can partly be attributed to failures on the administration entrance. That is mirrored within the sharp drop in return on invested capital of Exxon, which has dominated its friends for years, as proven within the charts above. Heeding investor requires change, the corporate has already added three new administrators to its board this yr.

A change of technique

All oil and fuel corporations have been within the warmth final yr, and ExxonMobil was no exception. Nevertheless, it offered a further problem. When demand for oil was crushed as a result of pandemic, ExxonMobil was within the midst of a large capital program. The corporate’s capital and exploration spending for 2019 was $ 31 billion and it deliberate to spend $ 33 billion in 2020. However sadly, COVID-19 halted these plans.

ExxonMobil, nevertheless, didn’t change its capital plans shortly, hoping the oil markets would ultimately recuperate. However markets remained robust, straining the corporate’s stability sheet and share value. Consequently, the corporate, a lot later than others, determined to chop its spending plans. ExxonMobil’s funding and exploration spending in 2020 was $ 21 billion, $ 12 billion lower than its authentic plans.

He plans to spend a lot much less – $ 16 billion to $ 19 billion – on capital and exploratory initiatives in 2021. That is a change in response to market situations. ExxonMobil plans to generate sufficient money to pay its dividend whereas investing $ 16 billion in capital initiatives in 2021 if the benchmark value of Brent oil stays near $ 50 per barrel for the yr.

Large offshore oil rig drilling rig at sunset and beautiful sky.

Picture supply: Getty Photos.

Going ahead, ExxonMobil intends to stability its three core priorities – stability sheet energy, capital and exploratory spending, and dividend funds. Given the uncertainty, the corporate has now integrated rather more flexibility into its capital plans. It will probably regulate its spending plans, relying on market situations, to generate most worth for its shareholders.

Actions to take care of the dividend

ExxonMobil can be centered on lowering prices. The corporate lower money working bills by $ 3 billion in 2020. It plans to save lots of a further $ 3 billion in prices by 2023.

Versatile funding plans, price reductions and enhancing markets ought to assist ExxonMobil keep its dividend for years to return – one in all ExxonMobil’s prime priorities. Notably, if oil costs fall and keep decrease this yr, sustaining the dividend might additional stretch ExxonMobil’s stability sheet. Paying dividends with borrowed funds isn’t precisely a super state of affairs for long-term shareholders.

As well as, the corporate continues to put money into a few of the inexpensive initiatives, notably in Guyana and Brazil. This could place it properly to develop in a wide range of pricing environments.

A lovely share for long-term traders

ExxonMobil’s inventory value has a robust correlation with oil costs, making the inventory unstable. Nevertheless, for long-term dividend traders, the inventory at the moment provides a horny yield of round 6.2%. Though it’s buying and selling close to its 52 week excessive, it’s nonetheless buying and selling at a lot decrease ranges in comparison with its 3 or 5 yr highs.

The great factor is that the enterprise is shifting in the fitting course. Affected person traders will possible be properly rewarded. Certainly, traders who held onto their positions in ExxonMobil in the course of the sharp value declines of the previous yr certainly have cause to rejoice presently.

This text represents the opinion of the author, who might disagree with the “official” suggestion place of a premium Motley Idiot consulting service. We’re motley! Difficult an funding thesis – even one in all our personal – helps us all to assume critically about investing and make choices that assist us turn out to be smarter, happier, and richer.

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